Heritage Insurance Holdings, Inc. — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed March 13, 2024. This is an annual report, not a quarterly filing. The company is a property and casualty insurer focused on personal and commercial residential coverage, operating in one reporting segment.
Financial and operating results
| Metric | 2023 | 2022 |
|---|---|---|
| Gross premiums written | $1.343 billion | $1.275 billion |
| Net premiums earned | $697.2 million | $637.1 million |
| Total revenue | $735.5 million | $662.5 million |
| Operating income (loss) | $63.2 million | $(157.4) million |
| Net income (loss) | $45.3 million; $1.73 diluted EPS | $(154.4) million; $(5.86) diluted EPS |
| Net cash from operating activities | $70.4 million | $(34.3) million |
| Cash and cash equivalents at year-end | $463.6 million | $280.9 million |
| Total investments at year-end | $569.4 million | $653.6 million |
| Total assets / stockholders’ equity | $2.153 billion / $220.3 million | $2.393 billion / $131.0 million |
| Long-term debt, net | $119.7 million | $128.9 million |
Losses and loss adjustment expenses (LAE) were $426.1 million, down 15.0%, principally reflecting lower weather and attritional losses and $1.6 million of favorable prior-year development. Ceded premiums were $626.5 million, up 9.6%; the ceded premium ratio was 47.3%, unchanged. The filing’s ratio discussion is inconsistent: one summary reports a 60.4% net loss ratio and 95.6% combined ratio, while the detailed ratio table reports 61.1% and 96.3%, respectively. The latter figures reconcile to reported losses and net premiums earned; investors should verify the discrepancy. The 2023 net expense ratio was 35.2%, versus 35.6% in 2022.
Cash flow improved, with investing activities providing $100.8 million and financing activities providing $14.5 million. Year-end cash, cash equivalents and restricted cash totaled $473.3 million. Liquidity benefited from reinsurance recoveries, the Hurricane Irma reinsurance commutation, investment maturities and a December 2023 stock offering; cash-flow improvement therefore includes significant timing effects.
Changes versus the prior year
- Net income swung from a substantial loss to profit, reflecting improved underwriting, lower losses, higher earned premiums and investment income, as well as the absence of the 2022 goodwill impairment.
- Average premium per policy rose 24.2%; premiums in force increased 5.6% to $1.36 billion while total policies in force fell 15.0% to 450,675. Management attributed the policy decline to selective underwriting and exposure management.
- Florida policies in force declined 16.0%, while Florida premiums in force increased 15.9%, driven by rate actions and commercial residential growth. Commercial residential premiums in force rose 63.9% year over year.
- Cash increased and reinsurance recoverables and unpaid losses declined, largely due to claims payments and recoveries related to Hurricanes Irma and Ian. Stockholders’ equity increased by $89.2 million, including net income, improved unrealized investment values and equity issuance.
- Net investment income increased to $25.8 million from $12.0 million, principally as maturing bonds were reinvested in higher-yielding short-duration assets. Interest expense rose 27.3% to $11.2 million as variable borrowing rates increased.
Outlook, risks and unusual items
- Outlook: The filing provides no numerical earnings or revenue guidance. Management plans to pursue rate adequacy, selective underwriting, geographic and product diversification, and cost-efficient reinsurance. It expects continued pressure from higher repair costs and potentially rising reinsurance costs and constrained availability.
- Catastrophe and reinsurance exposure: Nearly all premiums in force relate to coastal states. The 2023–24 catastrophe program purchased approximately $2.9 billion of aggregate limit; coverage depends on event severity, frequency and remaining limits. Losses above program protection remain the company’s responsibility, and reinsurers’ ability to pay is a risk.
- Reserves: Year-end unpaid losses and LAE were $846.0 million gross and $424.2 million net of reinsurance; net IBNR was $276.6 million. Reserve estimation was the auditor’s critical audit matter. The company cautions that actual claims, inflation, litigation and legal developments could differ materially from estimates.
- Irma commutation: The 2017 Florida Hurricane Catastrophe Fund agreement was commuted and final payment received in September 2023. Further increases in estimated Irma losses would be retained by the company, according to the filing.
- Debt and capital: Debt includes a $79.6 million term loan and $10.0 million revolving balance, with variable-rate facility borrowings bearing approximately 8.18% at year-end. Credit covenants tighten over time and can restrict dividends, repurchases and capital contributions to regulated insurers. The company reported covenant compliance. Insurance subsidiaries’ risk-based capital ratios exceeded 300%; combined statutory surplus was $251.6 million, while subsidiaries reported a combined statutory-basis net loss of $55.9 million for 2023.
- Other unusual items: The company recorded a $0.8 million impairment of named intangibles in 2023; it had recorded a $92.0 million non-cash goodwill impairment in 2022. A $6.4 million Osprey-related tax valuation allowance established in 2022 was released in 2023. The company raised approximately $24.7 million net in a December 2023 common-stock offering and private placement.
- Capital returns and ratings: No common dividend was declared in 2023. A new repurchase authorization of up to $10 million was disclosed after year-end, subject to applicable restrictions. KBRA outlooks were negative for the holding company and Zephyr, and stable for Heritage P&C and NBIC.
- Controls and contingencies: The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective. The company reported routine legal proceedings that it did not expect to have a material adverse effect and stated cybersecurity threats had not materially affected, or were reasonably likely to affect, the company.
Important facts for investors to verify
- Reconcile the conflicting 2023 net loss and combined ratio figures in the filing.
- Assess reserve adequacy and the sensitivity of results to adverse claims development, especially Florida litigation and catastrophe claims.
- Review catastrophe reinsurance limits, retentions, reinstatements, costs and counterparty recoverability, including the post-commutation Irma exposure.
- Monitor statutory surplus and RBC levels, debt-covenant headroom and restrictions on transferring capital from insurance subsidiaries.
- Determine whether underwriting improvement, premium growth and lower losses are sustainable after accounting for catastrophe variability, reinsurance pricing and exposure reductions.
- Check the effects of share issuance and any future repurchases or dividends on per-share value and liquidity.